CFA Level 1: Net Income Calculation using Average Cost Method

Net Income Calculation using Average Cost Method

Prev Question Next Question

Question

Beginning inventory of 50 units, purchased at $5

50 units purchased at $10

35 units purchased at $9

25 units sold at $15

70 units sold at $12

Tax rate = 40%

Beginning LIFO reserve = $300 -

Given the above, the net income using Average Cost method is ________.

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

Explanation

The Average Cost method first calculates the average value of each item in the inventory, including the purchases made during the period. In this case, the total inventory value at cost is 50*5 + 50*10 + 35*9 = $1,065. This is the value of (50 + 50 + 35) = 135 units. Therefore, average cost per unit = 1,065/135 = $7.89. Total

COGS under Average Cost method is then $7.89*95 = $749.44. The total revenue equals 25*15 + 70*12 = 1,215, coming from a sale of 95 units. Thus, pretax income = 1,215 - 749.44 = $465.56. The after-tax income equals 465.56*0.6 = $279.

Prev Question Next Question